1.Assume the economy is operating below the full employment level of output:

a. Congress votes to decrease business taxes on all small businesses in the United States. Using a correctly drawn AD/AS graph, show and explain how this change will affect each of the following in the short run:

i. Output

ii. the Price level

b. Using a correctly drawn and labeled Phillips curve, show and explain how this policy will affect each of the following as the economy approaches a new equilibrium:

i. the Phillips curve

ii. the natural rate of unemployment

2.Assume the Federal Reserve increases the money supply.

a. Identify an open market operation they might use to increase the money supply.

b. Explain how an increase in the money supply will affect nominal and real interest rates.

c. Explain how the change in interest rates caused by an increase in the money supply will impact each of the determinants of aggregate demand (C, I, G, Xn)